The brace on his right leg is a souvenir from his private equity firm’s annual ski outing to Alta, Utah. Mr. Nelson ripped his A.C.L. while heli-skiing. Because Masters of the Universe never just trip.

It has been a bumpy few years for Mr. Nelson and Providence. In February, one of the firm’s biggest investments, the security screener Altegrity, filed for bankruptcy in the face of fraud accusations. Providence had its entire $800 million stake wiped out, the largest loss in the firm’s 26-year history.

Altegrity was the latest in a string of bad bets for the firm. Last summer, it lost its entire $460 million investment in a for-profit college company after that company faced multiple investigations. Hundreds of millions of dollars were erased when the film studio Metro-Goldwyn-Mayer went bankrupt in 2010. A $675 million stake in an Internet retailer has been written down to zero, as has the $400 million it spent on a Dutch child-care group. The spate of poor investments caused Providence to deliver dismal returns in back-to-back funds.

Just days before he was to have knee surgery, Mr. Nelson, 58, sat in a small, dark wood-paneled conference room in the firm’s Rhode Island headquarters. He briefly closed his eyes while pondering what had gone wrong.

“We grew too fast. We were managing too much money,” Mr. Nelson said. “That was the hallmark of that era, but it doesn’t make me less disappointed in our results.”

He acknowledged that the firm made too many investments at precisely the wrong time, in 2007 and 2008, just as the private equity boom was cresting. “That was an absolute killer,” he said. “If you look at our terrible deals, they were done in that time period.”

And Providence, which rose to prominence on the strength of its telecom and media holdings, began buying companies outside its area of expertise. “One of our mistakes was definitely style drift,” Mr. Nelson said, using financial jargon for a firm’s straying from its stated investment style. “Altegrity was a good example of that.”

In the ego-filled world of Wall Street, it is rare to find an executive who readily acknowledges errors, let alone a series of them. But that’s not what Mr. Nelson wants written. Instead, he sees his firm’s story as one of recovery and redemption. The past is past. Providence has owned up to all of its problems and fixed them, he says.

“Everyone made mistakes,” he said. “The key is who learned from it? I like to think we did.”

Providence finds itself at a critical juncture. Despite poor performance in its two prior funds, the firm managed to raise $5 billion in 2013 for its latest vehicle. Some attribute that feat to Mr. Nelson’s gifted salesmanship and earlier track record. Others note Providence continues to benefit from extremely low interest rates, which have forced pension funds and others to seek returns in so-called alternative investments like private equity and hedge funds, which charge higher fees than traditional stock or bond funds. (Private equity firms like Providence invest in companies, mostly with borrowed money, that they hope to later either sell or take public at a profit for themselves and their investors.)

Providence’s future very much rests on the success of its current fund. The firm must post strong results, and it will have to do so while beginning to transition to a new generation of leaders.

A close look at Providence’s stumbles illustrates the perils of success and serves as a case study for what can happen when an investment firm — or any company, for that matter — grows too fast during a bull market and there is too much money chasing expensive deals.

Just a decade ago, Providence was one of Wall Street’s hottest firms. Mr. Nelson started it in 1989 and was later joined by Glenn M. Creamer and Paul J. Salem, all three graduates of Brown University and Harvard Business School. The firm reveled in its Rhode Island roots and “stealth mogul” status far from Wall Street and its brand-name rivals.

But a succession of hugely profitable telecom investments brought Providence’s partners prodigious wealth and attention. Among its most lucrative deals was VoiceStream Wireless, a company cobbled together through the acquisition of wireless spectrum. In July 2000, just before the telecom sector crashed, VoiceStream agreed to be acquired by Deutsche Telekom for $50 billion.

Providence’s timing seemed impeccable. It got in and out of a big bet on competitive local telephone exchange carriers before that market collapsed. Investors in a 1996 fund more than tripled their money after fees. A 2000 fund made nearly two and a half times its investments.

The media investor Haim Saban recalled his first meeting with Mr. Nelson in 2003, shortly after he had led a group in a successful bid for a German broadcaster. “I was so impressed by his ideas that, frankly, I reduced my share in the deal and asked the other private equity firms to reduce their shares so Providence Equity could invest,” he said.

Providence had established itself as the smartest media and telecom private equity player. That reputation would serve it well as private equity entered its golden age. Providence and its peers became major beneficiaries of a post-Sept. 11 economy of low bond yields and loose lending standards. Institutions, having had their stock portfolios crushed by the dot-com bust and ensuing bear market, began pouring money into private equity.

In 2000, Providence oversaw just $3.6 billion. A single fund raised in 2005 amassed $4.26 billion. Two years later, it raised $12 billion more — in just three months. By 2007, the firm had nearly $21 billion in private equity assets under management. It also started a credit arm, which quickly attracted billions to invest in fixed-income securities.

“The interesting thing about getting bigger is that when you’re in the middle of it, you’ve always been getting bigger. The relative increase was no different than the other ones,” Mr. Nelson said, shrugging. “We were doubling with every fund.”

The money catapulted Providence from a boutique into a megafund, allowing it to compete for deals with larger firms. Providence charged into the fray, investing half of the $12 billion fund in just two years.

This was the apex of buyout mania. Private equity firms, flush with cash, were paying top dollar for companies that would struggle during the coming financial crisis and Great Recession. Providence delved into areas like health care, Internet retailing and child care, often paying hefty sums for companies in sectors in which it had scant experience.

“The risk during this time wasn’t just style drift, it was quality drift,” said Peter Keehn, the head of private equity at Allstate Investments, who wasn’t speaking specifically about Providence. “After raising these big funds, if you couldn’t find assets that were exactly what you were dying to own, then you started to look at assets that were close to what you’d like to own.”

As Providence grew, Mr. Nelson looked to expand the firm’s Manhattan offices. The firm was outgrowing its space in the Lever House, a glass-box skyscraper on Park Avenue. (It’s nicknamed “the leverage house” for the numerous private equity and hedge funds housed there.)

Mr. Nelson moved the firm to the swooping tower at 9 West 57th Street, among the world’s most prestigious business addresses. The firm leased the entire 47th floor, placing it several floors above rivals like Apollo Global Management (43), Kohlberg Kravis Roberts & Company (42) and Silver Lake Partners (32). It was hardly a subtle message: Providence had entered the big leagues.

In the summer of 2007, Providence struck what would have been the largest buyout deal in history, the $51 billion takeover of BCE, parent of the phone giant Bell Canada. Not long afterward, Mr. Nelson appeared on the cover of Fortune magazine alongside the headline “The Biggest Deal Ever.”

That Fortune issue became a collector’s item — because the deal never happened. The BCE buyout fell apart in the ensuing credit crisis.

Still, during the height of the frothy markets, Providence completed a number of deals, and none was worse than Altegrity.

In 2007, Providence paid $1.5 billion for U.S. Investigations Services, a former branch of the federal government. Privatized in the 1990s, it provided background checks for government employees requiring security clearances.

Providence began adding related businesses onto USIS to create a bigger, more diverse entity it renamed Altegrity. First came the commercial background-checking firm HireRight. Next, in 2010, it bought the investigative firm Kroll for $1.1 billion.

The three business entities coexisted, albeit not always peacefully. Several Altegrity managers interviewed for this article said they butted heads with Providence partners over everything from strategy to acquisitions to sales of business lines.

That was the least of Altegrity’s problems. In 2011, a former USIS manager in Alabama filed a whistle-blower lawsuit that the government later joined asserting that 40 percent, or 665,000, of the investigations USIS turned in to the government between 2008 and 2012 were incomplete. USIS said the accusations did not fit the company’s record but noted that it had appointed a new leadership team and improved control protocols.

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Mr. Nelson appeared on the May 26, 2008, cover of Fortune magazine as his firm planned a $51 billion takeover of the telephone company BCE. That deal later fell through.

Altegrity took a major public relations hit after revelations that it had performed the background checks on Edward J. Snowden, the former National Security Agency contractor who leaked documents to journalists, and Aaron Alexis, the Washington Navy Yard shooter who killed 12 people in 2013. USIS said the background checks were conducted in strict accordance with a government-dictated contract.

The final straw was a hacking attack on USIS, which led the government to withdraw its contracts. With the loss of that business, and buckling under $1.8 billion in debt, Altegrity filed for bankruptcy protection this February.

Providence executives blame events largely outside their control for Altegrity’s failure. But they also all agree the firm shouldn’t have made the deal in the first place. “We didn’t have a particular expertise in that area,” Mr. Nelson acknowledged.

Not all of Providence’s investments during the boom were missteps. A $724 million investment in the German cable company Kabel Deutschland netted more than $3 billion. A stake in the AutoTrader Group, an advertising website, returned three times its money. The same holds true for a small education deal, Archipelago Learning.

But Providence and its investors are still paying for the firm’s overreaching into areas outside media and technology. The performance of the 2005 fund is abysmal. With an annual return of 3.5 percent after fees, it sits near the bottom of its peer group.

The 2007 $12 billion vehicle is also struggling, returning about 6 percent annually. For now, those two funds rank in the bottom quartile of other similarly sized global funds from the same year, according to an analysis by the research firm PitchBook. But some investors expect that performance to improve on potential gains on several investments including Asurion, a cellphone insurer; ZeniMax Media, a video gaming company; and wireless tower companies in India and Latin America.

For a lesser private equity player, back-to-back bottom-quartile funds would have spelled a firm’s demise. Providence survived, though raising a new fund was a slog. Several past investors declined, including the California Public Employees’ Retirement System and the California State Teachers’ Retirement System, which had a total of $1 billion invested in the 2005 and 2007 funds, according to the online fund-raising firm Palico.

But others, including pension funds in Washington, Florida and Illinois, increased their investments in the new fund. A handful of others, including Florida and the State Teachers Retirement System of Ohio, went a step further, taking an ownership stake in Providence itself.

"They have proven over many years their ability to create significant value for their investors,” said Michael Rees, the head of Dyal Capital Partners, in an emailed statement. Dyal, a unit of the investment manager Neuberger Berman, took a stake in Providence last fall.

Peter Chernin, the former president of News Corporation, received an investment from Providence in his new company, the Chernin Group. “There is no one in that arena who is as knowledgeable about media, technology and communications as he is because he’s been focused on it for 30 years,” Mr. Chernin said of Mr. Nelson.

Mr. Nelson sounds energized when discussing the future of media. The firm has been betting on demand for premium sports content, leading to investments in Major League Soccer, the company that runs the Ironman triathlon races, and Learfield Sports, which owns rights to college sports programming. While still in its early days, Providence’s 2013 fund has posted annual returns of 20 percent on paper.

Like many of the world’s largest private equity companies that started in the 1980s and 1990s, Providence is also dealing with succession issues. A nagging problem it has faced is how to retain top talent when its leaders show no signs of moving on.

In recent years, the firm saw talented people leave, some for new jobs, others because they specialized in areas Providence was no longer focusing on. Still others were frustrated that the firm’s leaders, including Mr. Nelson, Mr. Creamer and Mr. Salem, continued to reap much of the profits in the 2013 fund.

That is changing. This year, Mr. Creamer announced internally his intentions to take no profits from the next fund. As for Mr. Salem, he is currently on a six-month around-the-world vacation with his family, but he plans to return to his leadership role.

Mr. Nelson, who has no intention of stepping down from his chief executive post, has spent the last several years fighting to get his firm back on track from its bungled investments. Meanwhile, competitors like Blackstone and Carlyle have grown ever larger — selling shares to the public, putting a new generation of leaders in place and morphing into global asset management businesses.

From Mr. Nelson’s perspective, the Providence of old has returned. The firm is back to investing in what it knows. He noted that 700 budding financiers applied for just a handful of job openings last year.

“The culture is back to where it used to be in the early days,” Mr. Nelson said, leaning back in his chair and smiling, though in obvious discomfort from his injured knee. “People are happy to be here and are proud of the work we’re doing.”